In the postwar era, buying and holding stocks has been extremely rewarding. A $1 portfolio fully invested in the Dow Jones Industrial Average in January 1946 was worth $116 at the end of 1991, including reinvestment of dividends but no deduction for taxes an 11.2% compound annual gain. If the investor had missed the 50 strongest months for stocks, his annual gain would have fallen to a mere 4.0%.
Nevertheless, being out of stocks in bear markets proves to be an even better strategy. A portfolio that was out of the market in the 50 weakest months, but otherwise fully invested, rose from $1 to $2541 a 19.0% gain. Even a portfolio that was invested in cash during both the 50 strongest and the 50 weakest months, and was otherwise fully invested in stock, performed almost as well as the fully invested, buy-and-hold portfolio.
Finally, the clairvoyant investor who was short stocks in the 50 weakest postwar months and otherwise long stocks would have seen his $1 grow to a mind-boggling $44,967 a 26.9% annual gain.